Del Monte Pacific Ltd
SGX:D03
Earnings Call Analysis
Q2-2024 Analysis
Del Monte Pacific Ltd
Del Monte Pacific's second quarter and first half of the fiscal year 2023 depicted a challenging profitability landscape, despite maintaining strong market shares in its operating regions. For Q2, there was a 4.6% dip in sales to $667.1 million, influenced by reduced U.S. and export sales. This was contrasted with a slight 2.4% sales growth in the first half to $1.2 billion. However, the period was marred by a gross profit decline and an eventual net loss of $8.5 million in Q2, dramatically shifting from a net gain of $49.5 million in the same quarter last year. The first half of the fiscal year also saw a net loss of $21.6 million as opposed to a $19 million profit previously.
The company is tackling operational challenges by enhancing efficiencies and optimizing costs. In an effort to bolster market share, especially in the U.S., Del Monte is sharpening its focus on innovation, recovering margins, and tapping into underutilized channels. Moreover, the strategy includes a boost in production for the premium MD2 pineapple segment to cater to growing export demands. A notable decision made to address working capital concerns is the reduction of the U.S. pack by 10% in the forthcoming fiscal year, projected to improve the group's gross margin in FY2025. Even with this forward-thinking approach, Del Monte foresees FY2024 as a transitional phase, bracing for a full-year loss compared to the previously positive guidance.
While the overall sales decreased, the U.S. market, which accounts for a substantial 74.8% of group sales, saw a reduced revenue by 1.7% to $498.9 million. This contraction was partly because of an exit from lower-margin co-pack business and shrinking sales in specific categories such as plastic fruit cups and canned fruits. Nevertheless, growth through pricing adjustments and volume increases in particular sectors such as broth, stock, and the release of JOYBA Bubble Tea cushioned the impact. The Asia Pacific region encountered a 10.7% sales drop, primarily due to a decline in the export of fresh and packaged pineapple products stemming from earlier-than-expected pineapple harvests, affecting the supply in Q2.
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Good afternoon to everyone. Thank you for joining Del Monte Pacific's results briefing for the second quarter and first half ending October 2023. Representing Del Monte in this call are Cito Alejandro, Group Chief Operating Officer of Del Monte Pacific, DMPL, and President of Del Monte Philippines; Parag Sachdeva, Group CFO of DMPL; Greg Longstreet, President and CEO of Del Monte Foods in the U.S.; and I am Iggy Sison, Chief Corporate Officer of DMPL.Parag Sachdeva, our CFO will now present our results.
Hello, good evening, everybody in Asia, and good morning to whosoever is joining from the U.S. Overall theme for our Q2 results is that we continue to have strong market shares across mostly contracting categories both in the U.S. and Philippines, and our profitability has been challenged due to higher costs driven by inflation, lower pineapple supply, increased operating costs and interest expense.On Slide 5 we'll take you through the key highlights. For second quarter, Del Monte Pacific Group sales declined by 4.6% to $667.1 million on lower U.S. and export sales. As I mentioned, the group continued to maintain leading market share positions across all the core products and categories. We posted lower gross profit of $135.5 million due to higher costs and lower sales. And when it comes to our profitability, due to lower operating performance and increased interest expense, it resulted in a net loss of $8.5 million from a net profit of $49.5 million in the prior year quarter. Now on first half. Del Monte Pacific Group sales grew by 2.4% to $1.2 billion on higher U.S. sales. We posted lower gross profit of $243.8 million due to higher costs and overall resulted in a net loss of $21.6 million from a net profit of $19 million in the prior year period.On Slide 6. When it comes to our outlook, we do remain vigilant in managing our operating expenses throughout the supply chain from production to distribution with better operational and energy efficiency, optimized packaging, and reduced wastage. We continue to work on all those strategic initiatives. In the U.S. we are focused on increasing market share by executing a multifaceted strategy, including accelerating innovation, recapturing margins, and growing contribution from underpenetrated channels. We are planning, when it comes to our premium fresh segment, to substantially increase production of our superior MD2 fresh pineapple to support higher export demand of these highly sought after premium products.On the working capital side, as we have committed in the prior quarter, we are addressing the high carryover inventory levels from fiscal 2023 by reducing the pack in the U.S. over the next 9 to 12 months. And this will include lowering the fiscal 2025 pack across all major segments, including a 10% reduction in overall production volume in fiscal year 2024 itself. Our group gross margin will benefit in '25 from the inventory reduction, while for DMPL, excluding DMFI, we would expect to restore the productivity of our pineapple operations in the coming quarters and more importantly next year, partly offsetting impact from lower productivity of raw pine. The group does expect fiscal '24 to be a transition year and is therefore revising its earlier guidance. We now expect to incur a loss this year from a full year perspective. Again, we do not expect to incur any one-off costs in fiscal '24, just as we have demonstrated in the prior years.On Slide 7, we'll take you through a little bit more explanation on our results. Sales again have been lower at $667 million. U.S. sales declined 1.7%. Philippines also was lower marginally by 1.5% in local currency. International business declined by 30% on both reduced fresh and packaged sales. Lower exports of fresh and packaged pineapple products was impacted by low pineapple supply. Our JV in India declined again marginally in local currency. EBITDA of $64 million, down 49% from $124 million, mainly due to higher costs and to some extent lower sales. Operating profit of $44 million, down 57% from $103 million last year. Net loss, as outlined on Slide 5, of $8.5 million from a net profit of $49.5 million due to operating results and increased interest expense. Would like to also highlight with the focus on cash flow and working capital, our outflow from operations was $92 million, lower than last year's cash outflow of $158 million, mainly due to lower additions to inventory and accounts receivable.On Slide 8, we'll provide more background on our second quarter results. And as highlighted, due to lower sales in the U.S. and export markets, overall our sales was down by 4.6%. When it comes to growth from net pricing, the impact was approximately 3.2% on a groupwide basis. Our gross profit at $135.5 million was lower by 34%, driven by lower volume, inflationary headwinds, increased costs mainly due to higher inventory, and also lower productivity in our Mindanao operations. Gross margin at 20.3% is lower by 910 bps due to inflationary headwinds, as I outlined while talking about the overall gross profit and increased costs, as we do continue selling high-cost inventory from fiscal '23 pack, particularly in the U.S. Inflationary headwinds, as we have outlined previously and I will reiterate here again, refers to significant increase in metal packaging costs. It includes increase in raw produce costs driven by fertilizers and weather-related issues, both in the U.S. and Philippines, and in certain segments, we are also cycling higher ocean freight costs as we sell through inventory that was sourced in the prior years when there were significant logistical challenges, particularly when you're talking about imported items like mandarins and pineapple.Our gross margin for DMFI was at 19.1%, lower by 890 bps versus [ year ago ]. We did take multiple pricing actions as we have outlined previously, and they have partly offset the cost headwinds. Gross margin for the base business also decreased by 590 bps and that's also due to commodity headwinds and as mentioned due to lower productivity in Mindanao operations, which has been partly offset by pricing. Impact of commodity headwinds, inflation and cost increases is roughly $53 million from a U.S. perspective and almost $14 million for the base business. I will talk through and provide more background on gross margin in the coming slides.EBITDA at $64 million, lower 49% mainly due to lower gross profit and margin. Net loss, again, due to lower operating results at $8.5 million, significantly lower than last year. Net debt at $2.5 billion, higher by $441 million due to additional loans we have taken to refinance the redemption of $100 million of DMPL Series A-2 Preference Shares, and we did not redeem that as the pref dividend would be at a cost of 10% plus due to the step up, whereas our loans that we have used to refinance and redeem those pref shares are still at a much lower cost. Working capital loans [ of ] DMFI due to higher inventory that we have been carrying in the last 9 to 12 months has also been a factor for increased debt from a group-wide perspective. Our gearing ratio generally is high as we are coming out of our peak inventory build season, but due to our softer sales performance, as compared to our plan and also continued elevated inventory levels, our gearing ratio is at 6.8x as compared to 5.8x at the end of fiscal year '23. Net debt to adjusted EBITDA at 9.6x is 4x higher again because of increased debt and the net loss for H1 which is reducing our shareholders equity.On Slide 9, we'll provide some more background on our revenue construct. For the second quarter, U.S. constituted 74.8% of total group sales, which was lower by 1.7% at $498.9 million, mainly because we are exiting from lower margin co-pack business, and also we saw higher category contraction, particularly in plastic, fruit cups, and canned fruits. So these were the main drivers. When it comes to branded retail overall, it continues to be a big contributor to overall sales at 76.2% of our DMFI sales. And the revenue growth continued to come through pricing and also volume growth from key categories of broth and stock as well as our newly launched JOYBA Bubble Tea. Kitchen Basics, which we had acquired in August 2022, contributed $15.5 million to the revenue, which represents 3.1% of the U.S. sales. As I mentioned, we continue to hold leading market share positions across the core business on the back of strong commercial execution, increased distribution of core products as well as new product expansion. The new products that we have launched are contributing 7% to U.S.'s total sales in the second quarter.Asia Pac sales in the second quarter were lower by 10.7%, mainly due to lower exports of fresh and packaged pineapple products. As I mentioned, that was impacted by low pineapple supply which was driven by advanced harvest of NDF or in more simple terms increased prematures that we had in Q1, which lowered the pine supply in the second quarter. Export of processed pineapple products was also lower due to lower shipments to the U.S. and higher inventory since we were shipping a much higher volume in the second half of last year.In terms of pineapple supply, we expect that to normalize by the fourth quarter. That's what we are contemplating in our overall business projections. When it comes to Philippine market that delivered sales of $108 million, which was 1.5% lower in peso terms, and there were some key categories such as culinary and beverage segments that experienced growth mainly driven by the launch of some strategic campaigns during the last quarter. Del Monte continued to experience also increased market shares and improvement in market shares across key product categories such as spaghetti sauce and both packaged pineapple and mixed fruits as well. The 2 other barometers of how our Phil business continues to gain momentum are convenience store channels and foodservice. And happy to share with you all that both these channels are growing double digit with foodservice growing at 15.5% and convenience store growing at 13.2%, respectively. Innovation, just as we track in the U.S. when it comes to Philippine market, mainly through dairy and snacking, continued to be a big focus and contributed 2.5% of Phil market sales. When it comes to Europe sales, small part of our business at $9.7 million, that declined by 31%. And mainly, as I said, it was a low pine supply quarter for us and that led to some limitation in terms of meeting the customer orders, particularly in Europe as well as our S&W branded business in Asia.On Slide 10, this is a new slide that we have added so that we can explain our margin reduction more clearly and also enable you to understand how our margin would be restored in the coming quarters and in fiscal '25. Here I would like to highlight that our margin has been challenged, as you can see, by increased operating costs, both in the U.S. and base business, in addition to inflation. The operating cost impact is around 4.2% and includes increased costs from higher inventory and also unfavorable impact of very low pine volume and productivity in Mindanao. We do think, as we work through inventory reduction in particular, these increased operating costs will be reduced and our margin restored. Optimizing inventory will also help us in lowering trade spend and [ sundry sales ] that will also help in improving and restoring back our gross margins.Now on Slide 11, let me take you through our first half result summary. Sales of $1.2 billion, which is up 2.4%; U.S. sales up 5.8% from a very strong first quarter which had grown at 18.3%; Philippines is higher by 1.2% in local currency; our international business, as I had explained in Q2, overall declined by 18.5% because of reduced fresh and packaged sales; our JV in India was flat with growth of B2C business by almost 5% and that was offset by key account [ bid ] based business being lower. When it comes to our profitability, just wanted to reiterate that it's all on a recurring or organic basis. Last year we did have a one-off cost item mainly related to our early loan redemption of high-yield bonds. In total it was $71.9 million and $50.2 million on a net post tax basis.EBITDA of 115 million is down 41%, again due to higher cost from $194.5 million last year. Following that, operating profit also down 54.1% at $70.5 million and net loss of $21.6, down from a net profit of $69.2 million, driven both by lower operating results and increased interest expense between the 2 periods. Similar to Q2, our cash outflow from operations at $38.3 million is much lower than last year cash outflow of $153 million, mainly driven by lower additions to inventory and accounts receivable.On Slide 12, we'll share our more detailed results on a reported basis. Again, Q2 sales up 2.4% with net pricing contributing approximately 3.9% on a groupwide basis. Gross profit at $244 million, lower by 28%, mainly due to lower sales in Asia Pac, inflationary headwinds, increased operating costs, and lower productivity in Mindanao operations. Gross margin at 20.6%, lower by 860 bps due to inflationary headwinds and increased costs, as we continue to sell high-cost inventory from fiscal '23 pack, with gross margin for DMFI at 18.7% and lower by 850 bps versus year ago. As I mentioned in Q2, multiple pricing actions taken in '23 and August 2023 are partly offsetting the cost headwinds. And overall impact of inflation and other cost increases is approximately $97 million for the first half from a P&L perspective.Gross margin for the base business decreased 510 bps, driven by commodity headwinds and lower productivity in Mindanao operations, again partly offset by pricing. The impact of commodity headwinds and cost increases is approximately $23 million for the base business. EBITDA, mainly due to gross margin and gross profit of $115 million, is lower by 41%, and net loss that we incurred was $21.6 million due to lower operating results and increased interest expense. Debt-related KPIs, I won't repeat as I have covered them in detail along with the Q2 results.On Slide 13 would like to help you explain our revenue construct for first half. And Americas, again, constituted around 70% plus, to be more precise 72.5% of total group sales, higher by 5.8% at total of $857.8 million, mainly driven by a strong growth of our branded retail sales, which grew by 6.7%. Branded retail for first half contributed 77% to total DMFI sales. Revenue growth, again, was driven across the board by pricing, which was in line with inflation as you would have seen just from the Q2 bridge and also volume growth that we are seeing in some of our core businesses as well as innovation. These core businesses include canned veg, canned fruit, broth and stock, as well as JOYBA Bubble Tea. Kitchen Basics, $21 million in first half, and that represents 2.4% of DMFI's net sales. DMFI, again, from year-to-date perspective continues to hold leading market share, very similar to what I had shared with you for Q2. In terms of new products, now the contribution stands at 7.6% in the first half.Asia Pac sales lower by 4.7%. Similar theme. It was mainly due to low pineapple supply due to NDF, which was harvested in the first quarter, and that impacted our Q2 sales, so won't belabor on the same. Phil market at $183.7 million, 1.2% higher in peso terms. And again, higher sales were driven by strong performance of foodservice and convenience store channels that continue their resurgence post-COVID and grew by 18.4% and 12.2%, respectively. Innovation, especially dairy and snacking, accounted for 2.7% of Phil sales.Europe sales, again, driven by low supply, were lower by 16.2% in the first half, but we are expecting that demand would actually continue to be strong when it comes to our export businesses in the second half as we mainly look at improving the supply both on fresh as well as our processed pine volume as well.On Slide 14, I would like to conclude by sharing very similar theme on gross margin versus year ago. Same as Q2. The margin did get challenged by increased operating costs both in the U.S. and base business, in addition to inflation, and overall the operating cost impact was around 3.4%, mainly due to increased cost from higher inventory and unfavorable impact of lower pine volume and productivity in Mindanao. This should help you all in understanding our margin reduction and also more importantly reinforce that we will restore the same as we work through clear inventory reduction plan, optimize our network and warehousing footprint as we normalize inventory and stabilize our Mindanao plantation productivity and pine volume.With that, let me hand over for a more comprehensive business update from Greg and Cito. Thank you.
Okay, thank you. On Slide 16, we'll begin the recap of our Del Monte Foods USA business. Sales of $494.6 million, or 74% of group sales. For the quarter, sales decreased by 2%, as Parag commented. After a very strong first quarter, we did see softened demand in Q2, driven by a shift away from some intentional reduction in co-pack products, which are a margin dilutive business for us, and some slightly softer category sales broadly across the business. We did a good job of holding market share, which I'll comment on here shortly, gaining share outperforming our categories, but category contraction in Q2 was a factor negatively affecting our business.Branded sales and branded products grew by 0.5 percentage point within the quarter, led by some of our newer innovation around JOYBA Bubble Tea and our Kitchen Basics business which is demonstrating some very strong year-over-year revenue gains. And I would also comment that the foodservice channel continues to deliver some double-digit growth for the company.New products contributed to 7% of total sales in Q2. Our EBITDA was down 55% due to reduced margins from the significantly higher cost that Parag mentioned. That inflationary cost from our F'23 pack fully flowed through our sales and our cost of goods in this quarter, and that, combined with lower volume, led to a net loss of $3.5 million. In the first half, EBITDA was at $64.1 million, also down, and bottom line as a net loss for those same reasons in Q2.Next slide. As we alluded to, the fundamentals for the business in terms of market share and consumer preference remain quite strong in the U.S. We're growing our core business in our canned packaged vegetable business and can packaged fruit business as well as our tomato business. We continue to hold leading market shares, outperforming our peers in the category itself. But category dynamics continue to shift as consumers have changed some of their purchase patterns in response to economic uncertainty. They're buying less, stocking up less, and making different choices. We'll talk more about that in coming slides. So despite these actions, we have done a nice job of shoring up our branded business and strengthening our position with consumers. And we will continue to invest in bringing differentiated and innovative products to market, continue to expand our distribution channels and build these brands in the coming quarters and coming years.Next slide some of the highlights of those investments very pleased with the growth of our JOYBA business and the outlook for the JOYBA platform. We are going to see substantial growth in the second half of the year with JOYBA and a very strong year of performance in the year ahead in F'25 as we've expanded our production capacity for this business in support of strong demand nationally for these products. We had some very aggressive holiday merchandising plans that I will also share with you next quarter, but we had a very successful holiday in Q3. We'll be sharing some record market share gains the business achieved in the quarter.Next slide. Some of the focus on our broth and stock business. This category continues to be a shining star for us, continues to demonstrate growth even in these times of economic uncertainty and pullback in the U.S. markets, and also support our Contadina business, which has continued to be a strength for us in that tomato category.The next slide. A look at shopper marketing. We continue to invest in digital marketing and reaching the consumer on their path to purchase. A lot of work on JOYBA, a lot of work on Vegetable Meal Solutions, particularly around the holidays. Partnering with Walmart, Target, and Kroger to promote JOYBA, as well as our investments in our new organic tomato business and tomato brand Take Root with retailers across the country.Next slide. Foodservice, as I mentioned earlier, continues to be a star within the portfolio. Year-over-year double-digit growth, launching more interesting products that are perfectly suited for this channel. The new launch of our UPC-specific branded fruit cups is going to enable us to enter the vending space, micro market space, and really present viable grab-and-go healthy convenient snacking items for consumers wherever they're at. So excited about that business. That's ramping up quickly for us and will be a successful part of this portfolio. Doing more work as well in digital media, across foodservice channels and social media, with success.The next slide. We'll talk a little bit about consumer trends here. What we're seeing in the U.S. market is an era of calculated consumption and spending. Consumers are eating more meals at home, but they're opting for less costly food, stretching their meal, really cutting back on discretionary items. The cut in federal stimulus support has certainly changed behavior, and we're seeing consumers just operate differently. They're shopping across more channels for value, more just-in-time purchases, fewer impulse items, less stocking up and pantry loading. As we look at how the retailers are responding, we have seen active destocking these last 12 months from our retail partners, a propensity to promote more value across their store brands. We're seeing the level of promotional support peak as well. It's a very active marketplace. We had a very good holiday, but we had to invest in those holiday events to drive the merchandising support and obtain lead feature activity. And there's abundant supply across the industry right now, and I'll talk more about that in the next slide.What we have seen is that U.S. food companies and our peers are, similar to us, perhaps more than we've experienced, are seeing significant declines in volume. This is the first 6 months through November of the calendar year looking at our peers, and we're seeing 8% to 10% consistent declines among our closest peer groups in terms of large U.S. CPG companies. So it's a time of a reset with consumers across these categories. It's a time where many of us are cycling through inventory and working to promote our brands and our products with consumers and really looking to find new ways to drive growth.The next slide talks about those growth strategies. So we have a very specific strategic growth plan. We will continue to outperform our categories and grow share. We have much more work to do in terms of channel penetration and development. We have more work and opportunity driving distribution growth in existing channels. We're seeing more and more success with new products and brand expansion, and these products and brand expansion are margin accretive in nature. We will continue to win the holiday. I'm very pleased with the results that we're seeing in November and December in terms of share gains and merchandising support, and we'll share that next quarter, and working to improve our trade return on investment in terms of promotions.The next slide is perhaps more important than anything else. What we've entered into is an era of cost reduction. So we are intently focused on an ambitious cost takeout plan. That's how we will restore margins and EBITDA in our U.S. base business. We are full steam in terms of executing our inventory reduction plan and working very intensely to make sure that we're minimizing any risk with that inventory and managing that properly. We are implementing a companywide cost reduction and savings initiative north of $50 million that we'll be achieving in the next 12 to 18 months. We're also addressing talent gaps that are needed to help transform our organization and continue to create a leaner, more efficient, best-in-class operations organization as well as commercial selling organization. We have taken some dramatic steps to improve the forecasting and planning accuracy via increased analytics and that is paying dividends. We've seen much more consistent demand and supply accuracy and decreased bias these last several months and that will help us plan for demand over the next 18 to 24 months with accuracy and help us, as Parag mentioned, reduce pack volumes and quickly address and correct our inventory positions, and then lastly, driving efficiency and cost reduction while we reduce those pack and procurement volumes in the year ahead. So a very conscious and a very intense effort around cost reduction in the U.S. marketplace.And Cito is pursuing similar paths. I'll hand the presentation over to Mr. Cito Alejandro next.
Thank you, Greg, and good evening to all of you. Good morning in other parts of the world. I will now talk about Del Monte Pacific. So sales $179 million, down 14%. And this is primarily due to lower supply of both our processed and fresh pineapple. And 2 major reasons behind this: first is on our C74 variety for processed pineapple. The tonnage declined by 12% and this was impacted by severe weather-related issues that started at its growing cycle back in late 2022. And this is actually the reason and the 1 that contributed the most to our huge cost variance in the company this first half and this quarter. As to our profitable fresh MD2 fruits, the harvest fruits, in the second quarter had matured and ripened early. And this we call the prematures of pineapple. And most of them got harvested in Q1, thus leaving a big supply vacuum in the second quarter. But as I will go through later on, we're very optimistic that we will be able to recover this.For the Philippine market, sales of $108 million, minus 1.5% in peso terms and flat in dollar terms. And both culinary and beverage has started to grow behind new usage building communication campaigns, primarily in digital. But the fruits and pineapple category declined by 18%. And again, this is due to the pineapple fruit supply, particularly on our highly seasonal tropical fruit cocktail where we are short today going into the October to December period. Processed export sales $32 million, 22% down. Again, this is due to 2 factors: lower sales in the U.S. because we are correcting our inventory position there, as Greg alluded to earlier, and, of course, the aforementioned supply shortfall for the other markets. But note that if you look at the second quarter demand for other markets, it was pretty strong at 2.3 million cases versus only shipments of 2 million. We don't expect immediate recovery of supply, but we look to seeing this in the fourth quarter of this fiscal year.Fresh export sales $24 million, 33% lower, again due to the supply issue in the second quarter. But if you add up the first quarter sales and the second quarter sales, resulting sales for the first half now at $72 million, already 1% above prior year period. So we expect strong recovery of the supply in the second half, and we look to close the fiscal year in line with our goal.EBITDA $24 million, 34% behind, and net profit $1.9 million, 89% behind, again, due to supply issues, higher cost and, of course, higher interest expense. For the first half, EBITDA of $50 million, 28% behind, and net profit of $6.4 million, 82% behind for the same reasons.Next chart, please. So as far as market share is concerned, you will see that we have been able to retain our market leadership across the core categories. Couple of watchouts on this chart. First is in the area of beverage where we lost 3.3 points in a growing category. This is due to the growth of lower priced juices in PET format. We will address this deficiency when we introduce our new lineup of [ very ] breakthrough flavors of juice in a PET format this summer. Second watchout are the categories that are declining. We've got mixed fruit that's declining and this is primarily driven by higher prices on the mixed fruit over the years because of the cost of the metal can. But nevertheless, we've been able to increase our share. So the trick here is we may not be able to immediately arrest that category decline, but we are doing everything possible in marketing and sales to make sure that we grow our share faster than category decline so that we can continue to build our revenue and our sales. And in spaghetti sauce, even if the category is showing a temporary decline just this period, I'm not worried about this. I think we will get more traction into the holiday season and what's good is our market share is up and holding.Next chart. Just the couple of charts following will detail our marketing initiatives across the categories. So in the area of fruit, as you will see that we are trying to expand the usage of pineapple to more meals that specifically children like. And we're also doing a lot of local market activation on Today's. Today's is our lower priced offering in the mixed fruit product. A lot of efforts also are being devoted to TV, digital, and radio.Next chart. Qs far as our culinary, 1 of our fastest-growing and most profitable categories, we are pushing tomato sauce to increase further usage, despite it being an 85% share category. As far as spaghetti sauce is concerned, we have changed the positioning. What we want to do now is win in birthdays and push also alongside that heavy promotions and in-store activations this coming holiday season. So all well and good in this category.Next chart, please. In beverage we have repositioned this in a way. So from the previous very functional advertising that we've had in our beverage line, we have transitioned this more towards an overall general health in the area of goodness, giving juice that gives goodness. And we believe that this repositioning is very, very meaningful to our millennials and should be able to attract more of them to use our product. This new messaging of Give In To Goodness, you will see in our messaging, in our digital, TV advertising, and a lot of at-home visibility, and likewise in store. So this is a campaign that we started a couple of months ago that should continue through the holiday season. And so far we're seeing some positive developments as far as offtake is concerned.Next chart. Okay, Fit 'n Right. We're not yet done with this. This now is 1 of our most resurgent beverage lines. We have also repositioned this from just purely weight management and weight loss to 1 of fitness and energy, which I think is more towards the active lifestyle of our emerging target market.Next chart. In innovation, we continue to push on our very successful Mr. Milk product. One is we have lowered the price to our original price of PHP 52. Because with the series of price increases we took in the past 12 months, we saw a downturn in the offtake. So we decided that we would go back to the original pricing that was associated with its high offtake and success. We're maximizing Back to School, and finally, with regards to our Potato Crisp, a lot of digital marketing goes into this to address our millennial market.Next chart. Foodservice and convenience continue to grow. On the left side, you will see foodservice revenue up 15% versus prior year and 3% above pre-pandemic. We now have 588 new accounts, higher than pre-pandemic and proud to report that Del Monte products are now a key ingredient in 89 dishes of strategic customers. 10,565 outlets now open, all above pre-pandemic levels, including key accounts and general trade convenience. On the right side, revenue 30% up, but still 11% below pre-pandemic. But good to note that a good sign is the convenience store categories have now increased their outlets actually 26% more than pre-pandemic period.Next chart. As far as fresh is concerned, we continue to be successful in this area, in the market, and just wanted to report 2 significant fairs that we attended in North Asia. And this is our way of trying to expand our footprint to the consumers and to the trade in the China market. First is the Asia Fruit Logistica in Hong Kong back in September 6 to 8. And we are proud to be 1 of the bronze sponsors in this exhibit that very well attended by more than 13,000 visitors and over 700 exhibitors. So this is very good for us, and we do this on an annual basis. As you will see, we did this with our #1 distribution partner in China, Goodfarmer. They were there to help us support this endeavor. Next would be the International Fruit Expo in Guangzhou. We also attended this and very good attendance. You will see were very well merchandised and this is 1 of the key things that we do in order to push our S&W, not just to consumers, but the channels in North Asia.And again, next chart, pleased to report that we continue to have good market share in fresh. We have increased our North Asia market by 1 percentage point to 38%. China remains solid at #1. Korea has decreased a little bit, and this is just because of the lower supply allocation in this market. And good to note that Japan has increased market share by 2 percentage points with improved demand versus last year.Next, and finally, our frozen Nice Fruit product. Just wanted to report on this good development that we have launched this in Ireland by Green Isle as 1 of the latest additions to their perfect-for-lunchbox and on-the-go fruit snacks. And these are now available in all major retail stores in Ireland.So that's it from my side. Iggy, back to you. Thank you.
Thank you, Cito. In the interest of time, so we can proceed to the Q&A, I will not go through the next 2 slides on sustainability, and we'll go straight to the recap of the outlook followed by the Q&A.So DMPL will remain vigilant in managing our operating expenses throughout the supply chain. We expect to deliver higher branded revenue growth in FY 2024. In the U.S., we are focused on increasing market share by executing a multifaceted strategy as described by Greg earlier. We're planning to substantially increase production of our superior MD2 fresh pineapple, as discussed by Cito, to support higher export demand of these highly sought after premium products.We are addressing the high carryover inventory levels from FY '23 by reducing the pack in the U.S. over the next 9 to 12 months, and this will include lowering the FY 2024 pack across all major segments. The group gross margin will benefit next fiscal year, FY 2025, from the inventory reduction which was also referred to by Parag earlier. While DMPL, ex DMFI, will benefit in the second half of this current fiscal year from the restoration of productivity in our processed pineapple operations.The group anticipates that FY 2024, despite the higher branded sales growth, will be a year during which the company focuses on reducing inventory and further lowering operating costs. DMPL has taken the decision to revise its earlier guidance to the investing public and now expects to incur a loss in this financial year.So with that we'll proceed to the Q&A and Jennifer Luy, who's responsible for IR, will moderate the Q&A.
I was thinking, Jenn, having read the questions, should we first outline the outlook, what we are doing so that we can cover several questions in one go?
Yes. Please go ahead, Parag.
Thank you so much, Jenn. So the first theme that I see from the questions is whether we would be able to restore our margins considering our performance in the first half and in Q2. And our response would be that we do not expect margin improvement in the short term or in the coming quarters as we saw in Q2.With our core categories having declining trends, we will not be able to lower our cost in areas like warehousing and distribution or optimizing trade spend and some incremental waste which goes with higher inventory. So we are, on the basis of that, really resetting our guideline that we would incur a loss in fiscal '24. But as we have explained and outlined in our margin analysis, we exactly understand and are making clear and decisive actions to lower our inventory for the next pack by 20% to 30% in the U.S. We have already reduced our inventory in our base business, which will be a very good stepping stone for restoring our margins once we are able to address our productivity issues on Mindanao plantations.So, to summarize, yes, we have a margin restoration, but it won't be achieved in the short term in the coming quarters. Once we optimize the pack for next year and lower the inventory to normal levels, which would mean reducing inventory by $200 million to $250 million by next year. That will allow us to reduce our costs, our operating costs that we have been incurring, and are seeing to continue our margin erosion in fiscal year '24.So that was the first part that really covers or talks about our margin outlook and how do we see our margin improving in fiscal year 2025. So, clear path, we may not get to 29% in '25, but by reducing the operating costs, which also helps the cash flow and interest expense, we would certainly improve our margin performance in the middle of fiscal year 2025.Let me pause to see if there is any other comment that Greg or Cito might have in terms of margin restoration or improvement.
Greg, you're still on mute.
No, I think you covered that well, Parag. I think there's an intensive focus on cost management, cost reduction in the U.S., and as well as Cito referenced, new products and innovation and channel growth and distribution expansion will help improve mix. We're both pushing more branded business, which is where we generate our profitability. This reset year of exiting co-manufacturing business and margin dilutive business will be behind us, and we'll be very focused on branded growth and development with a very disciplined cost management and cost control. And that's how we'll restore margins here in the near term. Anything to add, Cito?
I think that's spot on, Greg. And I wanted to assure everybody that restoring our healthy margin to our previous levels is an imperative. For DMPL, the #1 priority is the plantation. It's our C74 processed variety. I saw a question asking what really happened here. Well, very simple, the productivity that we were expecting from the fields did not come out. So in the past 7 years, we would get about between 165 to 170 tons per hectare. And in fact we had a peak of close to 183 tons per hectare back in FY '21, I think. But unfortunately, with the harvest that we had this year, they suffered a lot during the 2022 La Nina period. We thought that we would have arrested it, but at the end of the day, it came out as it was impacted. So the tons per hectare went down to as low as between 140 to 143 tons per hectare. So that's a big change. And once that change happens, that means that you have smaller fruits, smaller weights, and therefore the total tonnage is affected. And that has also caused the big shortfall in our supply.The demand is there for our processed products, even for the Philippine market. So we have to correct that because that has impacted our cost absorption. And from the fields that we have inspected going into FY '25, we have all the reason to believe that we will be able to turn around the tons per hectare from where we are today going into FY '25. And once we turn that around, the cost parameters will also change, and we will be able to, as much as possible, get out of the cost impact of the lower tonnage. That's all I can say.
Thank you, gentlemen. We have a question on price increases for 3, 4 quarters already, it's always been observed that costs continue to increase. This is a given and inflation is here to stay. There's nothing we can do. But why doesn't the company do more frequent price increases, but maybe small ones on a monthly basis? Because if price increases continue to lag behind inflation and increases in operation costs, then the company will continue to suffer losses.
I think to continue with the margin discussion, I wanted to take up a few questions around why we were not able to achieve cost reduction first, Jenn, and then we'll touch upon pricing. So there is a question why we did not achieve cost reduction despite the fact that we had stated that in the prior quarters. So again, just to summarize, we were not able to anticipate the category declines the way we have seen really how it has panned out in the last couple of quarters. And that has meant we have not been able to bring down our inventory and are holding higher inventory than what we were projecting. This has resulted in some increased costs around warehousing, distribution, and also increased waste related to those inventories, plus higher trade spend, which has led to us not being able to anticipate margin dilution to the extent we have seen, and also lack of cost reduction as compared to what we were planning and anticipating.So it does go back to the macro trends that we are seeing unfold in our categories and which we are now capturing very well and are going to be very decisive in lowering inventory and cutting the pack getting into next year, which will allow us to really bring down all the related costs and inefficiencies which we are seeing in our operations, both on the cost side and also to some extent on our revenue mix and trade spend side.So that should answer 2 or 3 questions around continued cost being higher and margin dilution. And then on pricing, based on the question that you asked, we have taken pricing on a regular basis, of course, not every month, because it's not practical for us to announce price increases to the trade. That require a 60-to-90-day period when we have to execute price increases. It's practically impossible in our business to execute such price increases with the retailers if we have to do it at very, very short intervals. Particularly, we are not a fresh business. Plus, we are also in many segments having private label as our competitor, and they are obviously very reluctant, particularly in the U.S., to take up prices that often or that frequently, which also limits our ability to take pricing.We do think that both in the U.S. and in Philippines, plus our export markets, we have taken pricing in line with inflation and made sure that affordability is considered, and we are not losing momentum on our market share. And that has been of also paramount importance to make sure that from an overall perspective, we continue to enjoy good market shares in the categories we operate. So that's a little bit of context, and I'll request Greg and Cito to also talk about more frequent pricing to address the margin situation.
I think you answered that well, Parag. I would just say that we're constantly looking for opportunities to price, and depending on the category, there will be more pricing action in the opportunities that exist to pass through inflation. And we're exploring those and evaluating those. And any opportunity we get, especially in an annual quote or a rebid of business, we are raising pricing and trying to pass through more of this inflation. It's an ongoing process. It'll be with us for the foreseeable future. But as Parag suggested, there are elasticity factors and competitive factors and limits to what we can do and the frequency of what we can do. So it has to be a combined effort of just consciously being aware of pricing opportunities with a very deliberate approach on cost reduction. And there's 1 other question related that's on a similar question, Parag, I see Kitchen Basics questioned. I would just say that we are quite pleased with the turnaround that we've delivered on Kitchen Basics. This was a struggling business. It's why we got it at such a value on the acquisition, and we've really turned the corner and are demonstrating some very strong growth and it does deliver a very attractive margin. So this is a profitable business. We see a really bright future for this business in a very good category that is growing. So we like the outlook for the next 12 to 24 months with Kitchen Basics and continue to be pleased with our progress, especially with some of the largest retailers like Walmart, which has expanded distribution, expanded support, improved our GTMS, and we're seeing very strong double-digit growth at Walmart these last 13 weeks.
And I can confirm that it is margin accretive to the group and to DMFI.
Thank you. Parag, I'm not sure if you've covered this earlier, how much of the 2023 high-cost inventory remain unsold? And are the new inventories produced at lower cost now?
Yes, we are seeing some favorable impact from deflation, but as I said, at the same time, we continue to incur increased costs in areas like warehousing, in areas like distribution. As a result of that, we are not seeing the margin improvement that we were expecting. So the deflation is happening, but it's incremental. It's not significant. But we are hoping that next year we should see some increased impact from deflation, both on the raw produce side as well as metal packaging, too, as we go into the next pack.
Thank you, Parag. What is the quarter cash burn, and how long can our cash last?
Yes, I think I did cover that in my commentary, but I'll again reinforce that cash flow obviously continues to be a big focus for us. And in the second quarter, our cash flow from operations -- outflow from operations was at $92 million, which is much lower than last year outflow of $158 million in the second quarter. And in the first half as well, if you have to look at our cash outflow, it was at $38 million, much lower than last year of $154 million. So that is the improvement in cash outflow in the first half where we normally build inventory, as you are all aware, I would also reinforce that inventory reduction in the base business without DMFI has been achieved. When it comes to the U.S. business, we would have to achieve inventory reduction over 2 years, partly by reducing the pack this year, but by a more decisive and bigger cut on pack next year, we would be able to bring down our inventory by $200 million to $250 million. But it's a 2-year plan.
Okay. Thank you so much, Parag. Back to Cito, on the weather issue in the Philippines. Too much water or rain, but can we really correct it? Isn't this dictated by nature?
Obviously, we cannot correct it, but I think what we need to do moving forward is to increase our measures by which the impact on our fruits are lessened. And unfortunately, we did not see much of that. So in the reset that we're doing right now, we are looking back at our protocols. We're looking back also at our monitoring and audit parameters. They say that El Nino is coming up this coming next 6 months, so we're also prepared for that. So I think you're right, we cannot control it, but we should have done more. And that is the lesson behind this.
Thank you, Cito. Back to Parag. There are talks of bringing down interest rate in 2024 with $2.5 billion of debt. How much will a 100 bps reduction impact interest expense?
Yes, I did the maths before answering and rubbed my eyes just to be sure that 1% reduction on $2.5 billion could be anywhere between $15 million to $20 million for us. Of course, some of our loans are at a fixed rate, so we won't see the benefit. But overall, if we are able to achieve a 1% reduction on, say, half of our loans, which are on a floating basis, we would see a reduction of close to $10 million to $15 million on interest expense.
Thank you, Parag. For our last question, so this will be on outlook. Outlook for the third quarter and for FY '25, and given that we're now 2 months into the third quarter, are we seeing any positive developments in the first 2 months of 3Q?
Again, I would reiterate that our branded sales continues to be strong, but in terms of margin improvement, we don't expect to see a change because our productivity issues on Mindanao side will take time and the costs that we are incurring in the U.S. related to some of the inefficiencies and increased warehousing do continue and therefore the resulting impact won't really change our margin profile in the short term.
Okay, thanks so much. That was the last question we had. So thank you for clearly explaining our plans and our outlook for third quarter and FY '25.
Thank you very much.
Thank you.